Joe Noyons - IR, Three Part Advisors Jay Sidhu - Chairman & CEO Robert Wahlman - EVP & CFO.

Joseph Gladue - Merion Capital Group Mike Pareto - KBW Robert Haderer - Sandler O'Neill Bill Dezellem - Tieton Capital Management.

Good afternoon and welcome to the First Quarter 2017 Customers Bancorp Earning Call. At this time all participants are in listen-only mode. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Joe Noyons, Investor Relations for the Company..

Thank you, Tom and good morning everyone. Customers Bancorp released our earnings release today after the close, so it is also posted on the company's website at www.customersbank.com. Representing the company today are Jay Sidhu, Chairman and Chief Executive Officer; Bob Wahlman, Chief Financial Officer; Dick Ehst, Chief Operating Officer.

Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties that cause actual performance or results to differ materially, including the risks that the results are different than currently anticipated.

Please note that these forward-looking statements speak only as of the date of this presentation and undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by securities laws.

Please refer to our SEC filings; including our report on Form 10-K and 10-Q for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. At this time, it is my pleasure to introduce Customers Bancorp CEO, Jay Sidhu.

Jay, the floor is yours..

Yes, thank you so much, Joe. Good morning, good afternoon ladies and gentlemen. Thank you so much for taking the time to be on this call. The way we will organize this call is that I'll go over some of the highlights, financial highlights and then Bob Walhman our CFO will go over some details about our financial performance.

And then I'll come back and discuss with you our unique business model and the performance over the last couple of years as well as our view on each of the lines of businesses that we are involved in both talking about expectations and challenges of each of those.

So talking about our performance, we are really pleased to report another record quarter to you. First quarter as you know, first quarter 2017 net income to common shareholders was $22 million that's up about 31% over first quarter 2016. Our diluted earnings per share were $0.67 that's up 15.5% for over first quarter 2016.

Our first quarter net income to common shareholders from continuing operations as you know BankMobile is not -- is a discontinued operation so if you take that out our net income to common shareholders was $23.3 million and that's up about 29% over last year. And our return on average assets for first quarter 2017 was 1.09% percent.

And our return on average common equity was 13.8%. We're pleased that that puts us among the top quartile of banks in the United States. And the pretax pre-provision return on assets and return on average common equity for first quarter was 1.51% and 20% respectively.

Our book value per common share was $21.62 at March 31 and that's up 12.5% over March 31, 2016.

From a capital point of view we've been very focused on it as we get ready to cross the $10 billion mark, so I'm pleased to share with you that out capital ratios were 13% to estimated total risk based capital, 9% Tier 1 leverage and 6.7% tangible common equity to average tangible assets.

From an overall business point of view total loans were up little over 5% to $8.5 billion or $8.3 billion at March 31, 2017 and total deposits were up about 8% percent to $6.6 billion over in last year.

And our first quarter efficiency ratio from the continuing operations was 43.3% and that's a pretty significant improvement of about 7 percentage points over the same period last year. And so with that, I'd like to hand it over to Bob to go over some details of the financials..

Okay. Thank you very much Jay and good afternoon everyone. As noted by Jay and as described in our first quarter 2017 earnings release, customer is just reporting gross assets of $9.9 billion which is up $900 million from March 31, 2016 and up $500 million since December 31, 2016, so quarter ago.

Q1 2017 earnings per common share was $0.67 per share, which compares to Q1 2016 earnings per common share of $0.58 in Q4 2016 earnings per common share of $0.51. So all earnings metrics our customers are very positive from Q1 2017. I'm going to take just a moment to put a few of the key ratios in the context and Jay has referred to these.

So I'm going to put in a little different context.

Customer set out 3 years ago or set customer or set targets 3 years or more ago that they wanted to hit from some of these earnings metrics and that is the return on average assets of 1.0% was set and return on average common equity of 12.0% was established and a target with efficiency ratio in the low forties was that many of you who have been following us for 50 years perhaps remember though.

I just want to compare those to where we are now just 3 years later when we do our reporting and return on average assets of 1.09% return on common equity 13.8% and efficiency ratio the local forties. So we have exceeded those targets and we are of course setting new targets that we're going to work very hard for our shareholders to achieve.

A second set of key ratios that many investors have talked to myself and talk to Jay about as we met with them over the past couple years, where our regulatory capital ratios that are capital ratio in general.

There was some concern out there for the investor community that the capital ratios were too low and therefore they were what was placed into the stock was there would be a dilutive capital raise. During -- I want to emphasize a couple of things here.

During 2016 customers increased its capital by over 50% so over $300 million while diluting common shares only around 10% this was accomplished by retaining our earnings, a common stock raise and preferred stock races.

But set our capital ratios at levels significantly in excess of the well capitalized levels, which includes total risk based capital at 13%, Tier 1 risk based capital 11% and CEP one ratio at 9.5% and leverage ratio at 9% and as Jay just noted a minute ago, we have reached those targets for all of our capital ratios with the exception of CEP one when we view some preferred stock instead of common stock in our capital stack, a little bit different but it still provides the capital needed.

So we are hitting the capital ratios and these are very strong ratios and very close to the midpoint of our peer banks industry peer groups. So I just want to emphasize that as it raises the capital.

So the third key item here is we do watch our asset quality very carefully and are very proud of maintaining the strong asset quality that we have in customers.

Tier 1 2000 17 NPL's were only 33 basis points all up a bit best for some isolated credit issues on individual loans it is in fact much lower than our peer group and much lower than the industry nonperforming loans taken as a whole.

We have not compromised our underwriting standards and we're committed to not compromising our underwriting standards as we go forward and look for strong asset quality. So these actions taken, as well as many of the other actions taken apparently has positioned customers for a good strong run of sustainable earnings.

Let me walk you through the significant events as caption the income statement and discuss the other drivers of the performance. Net interest income from Q1 12017 was $62.4 million compared to $57.6 million in Q1 2016 and $64 million in Q4 2016.

Average loan balances were higher in Q1 2017 compared to Q1 2016 up $1.6 billion and that drives most of the increase and those numbers and they could have been higher except we have worked very hard on in Q4 2014 to keep our assets under $10 billion.

So the loan volume is good and that has driven the rate increases, I mean them arm net interest income increases. Regarding interest rates, customers reported a net interest margin of 2.73% in Q1 2017 compared to 2.88% in Q1 2016 and 2.84%.in Q4 2016.

The net interest margin declined during Q1 2017 compared to Q4 216 is really attributable to 2 key matters; the decline in the outstanding balances of the warehouse portfolio, down in Q1 average balances approximately $655 million from Q4 and down $250 million for 2016.

As we have talked about in the past that is a business that is very much seasonal with lower volumes during the winter months as residential mortgage loan originations are lower.

In customer funds a significant portion of that portfolio using low cost overnight funds because of the short term duration of the asset, and that provides us a very strong net interest margin.

And then there is the second element is to deliver the fact of falling margins on investment portfolio and cash in the Federal Reserve on dialysis which were up about a combined $550 million. So you had a decrease in higher margin assets in an increase in some lower margin asset.

So as a result of this shift in the use of funds customer's interest income declined by approximately $3.6 million compared to Q4 2016 which reduce the yield on these earning assets by approximately 15 basis points.

However as we look forward to Q2 and Q3, we do expect the mortgage warehouse loan balances to recover following the seasonal reduction in the volume that we experienced in Q1 and assuming we sell or manage the purchase investment securities portfolio to fund that growth, we should see the NIM increase back to more traditional levels in Q2 2017.

Noninterest income from continuing operations for Q1 2017 was $5.4 million and excluding the impairment on the Religare security non-interest income was $7.1 million. This is a good number and its up from non-interest income for Q1 2016 up $5.3 million a $1.8 million increase.

The increase in non-interest income results from greater gains on sales of loans in the SBA business, I'll compare to the past a year ago, as we grew that business over the past year and then in the first quarter 2017 customers did sell approximately $100 million of multifamily loans in this period for a $0.5 million gain.

And then there is the swap premiums on market derivatives that are included in this item for about $1.5 million.

As has been described in our securities filings on several occasions, customers operating expenses have been increasing in general as Customers Bank grew due to the additional resources needed of all types to run the larger banking business. So we needed more employees, we needed more space to occupy.

We needed more technology, professional services in fact because the bank was bigger and became more complex.

However, in Q1 2017, what we saw is that as asset growth has moderated and as we work to stay under $10 billion for now operating expenses actually decreased to $30.1 million from continuing operations, now that's a decrease of $1.7 million from Q1 2016 and a decrease of $400,000 from Q4 2016.

So it seems that we have had some consistent decreases in our core banking costs over the course of the last year. Correspondingly our efficiency ratio from continuing operations has declined to 43%.

There are increases and decreases embedded in a different expense light, but the overall trend is for operating expenses continue operations to that growth to moderate at the level of asset growth is moderated and expense control has been an area of management focus as the bank has grown in particularly during the first quarter.

Regarding income taxes, Customers estimated income tax rate that we use for federal state and local is 38%, however in Q1 2017 Customer recorded tax benefits related to the vesting of restricted shares an exercise of options of $2.5 million and that's following the GAAP accounting rules and we talked about that extensively last quarter, when we adopted ASC 2016-9.

And then customers also recorded a $3.5 million deferred tax assets at this period on, which offsets the bottom, which relates to the $9 million of impairment charges recognized by customers related to our equity investment in Religare enterprises.

You may recall that in the fourth quarter we recorded a $7.3 million impairment charge in this court and we did not take any tax benefit at that point in time because of the rules that would allow us to do so which would mean that they have a executable tax strategy that was prudent and reasonable.

During 2017 customers developed those tax strategies and obtained clarity around our ability to execute those strategies that allow customers to realize the tax benefit on the full set of impairment losses.

$0.7 million to the tax benefit relates the Q1 2017 impairment recognition and then $2.8 million of this related to the impairment recognized in Q4 that we could not recognize until we had a prudent strategy in place.

Just turning for a moment quickly to the BankMobile business segment, in Q1 2017 the BankMobile business segment which is reported as a discontinued operations in our consolidated income statement reported a net loss after taxes of $1.2 million, compared to a net loss of $1.1 million in Q1 2016 and a net loss of $3.5 million in Q4 2016.

The Q1 2016 result did not include the student loan proceeds, so I don't think is a reasonable comparison. But the Q4 numbers both and the Q1 numbers both include the operating results of the disbursement business.

The improvement in the GAAP operating results in Q1 2017 compared to fourth quarter of last year is due to receipt of the students of their monies on their refund in January and then having that spend for 3 months whereas in the third quarter the monies were received in August and September and we did not have its highest spend in those 3 months and of course this business is driven by the interchange income that's received on that spend.

It's important to note here that one, we are growing that business and it is a scale business but secondly that the GAAP results that I just talked about in this paragraph are not reflective of what the business earnings are that the business would earn if it was a standalone entity or even what the business earnings would be and management's internal reporting.

The GAAP earnings does not give the business segment any credit for generating over $700 million in deposit which are then used to fund balances, loan balances across the bank.

We do provide statement reporting it is in the earnings release and it is in the investor presentation an honest statement reporting faces customer calculate that business contributed $1.5 million to customers after tax net income for the period and that's assuming funds transfer pricing equal to about 1.95% on those deposit balances.

And BankMobile was an independent company, the business could directly invest in debt securities or loans that would have even a higher yield than the 1.95% that we allocate to them.

So in summary Jay, I believe that customer has a very strong start 2017 a very positive start in that barring any unforeseen surprises we will enjoy record earnings for 2017, back to you..

Thank you, Bob. We view this period as a very sort of like a milestone because as you've seen and you heard from Bob that Customers Bancorp's total asset is worth $9.9 billion at March 31. So you should expect us to cross the $10 billion mark, whether it happens at second quarter or third quarter but it's going to happen.

So we see a tremendous amount of growth in our pipeline and customers is well positioned to do that.

So as part of that strategy, we are very well prepared and have been involved for the last 12 to 15 months for the $10 billion category and we are, we believe that all the GAAP analysis and the strategies that we've developed show us that we are very well prepared for that.

And so we believe that we will not be a DPAST compliant company till 2019, however we believe that there is a pretty good chance that he might be doing a drive sort of a run for DPAST either at end of this year or in the middle of next year so that by 2019 it's a very smooth movement from being a below $10 billion bank to above $10 billion bank.

As many of you may know, it was about 7 years ago that Customers Bancorp was formed and we started off as though extremely troubled Rs.250 million asset company and now here we have reached a milestone of the $10 billion as a company and we have done it principally all from as a result of organic growth.

So what has been our strategy, so we have been a very highly focused innovative relationship banking based commercial bank, a business bank. That's been focused on strong organic growth focused on effectively utilizing our capital. Focused on good resource allocation and a branch like model and operating in attractive markets.

As you know our markets have been Boston through Philadelphia along Interstate 95 and we've done that also with a very robust risk management driven business strategy.

About what's been our model and consistently for the last 7 years since we were a troubled $250 billion bank that needs some of us personally invested in to take it to $100 plus market-cap company today. The number one has been what we call the unique single point of contact model.

What that is high tech high touch model with a very, very few bank branches, dominance in few product lines and supplemented with very experienced leadership teams at school throughout the market franchise and having a style that is extremely innovative and do some would call it disruptive to the traditional banking style while through our robust risk management infrastructure having a strong asset quality and a strong focus on other types of risks and then hence resulting in creating a high growth company with superior performance.

What have we created in the last 7 years besides higher assets, we've created a company where the total revenues just 5 years ago were $50 million and today there are 2, last year there were $272 million. And the growth that we experienced we took pause button on that since June 30 last year.

And we feel that we are positioned to take our foot off the pause button because it was prudent for us to build our infrastructure, get ready for the $10 billion, get our capital in places, get our systems and processes in place and so we expect you should expect us to continue with our growth strategy.

And these revenues have grown at an act compounded annual growth rate of 38% percent over the last 5 years and go we that gay men pro as a result of organic growth and to and we expect to see you should expect to see the similar growth in terms of dollars of business coming into us.

Our net income over the last 5 years we were making the only $2 million in 2011 that's all we made. Our net income as you know was over $85 million last year and it was $21.5 million just from the content, when you take out all sorts of unusual items this quarter.

Our net interest income has grown over the same period kind this is 5 years from $39 million in 2011 to $250 million in 2016. And at the same time while our net interest income, from like I mentioned to you from $39 million to $250 million our expensive grew only from $37 million to $130 million.

That is the reason why our efficiency ratio which was about 90% 5 years ago is today down to 43%. From a deposit growth point of view, you know the numbers for this year. Our total deposits five years ago were only $1.5 billion. Our DD is 5 years ago but only $150 million. Our cost of departed 5 years ago was 1.2 percent.

Our average deposits for branch 5 years ago, was $100 million compared to about $400 million today. So that's what we mean by our branch life model. This single point of contact model has been very effective for us in executing our strategy. Today banking the privately held businesses those commercial loans make up 37% percent of our portfolio.

Banking the high network families that's our result of product dominance, which are some of you call them multi-family loans they'll make up 40% percent of our portfolio. Commercial real estate which is the main driver for most community banks in the United States only makes up 16% of our portfolio.

So our total loan growth has been 38% over this 5 year period. Some may regard this is 38% CAGR over this 5 year period. Some may regard this to be significantly above average growth hence you may say that many times comes with problems. So let me share with you the non-performing asset trends which I'm sure many of you are aware of.

Today our non-performing loans are 0.33. 5 years ago they were 0.72. So there's a consistency of performance with continued gradual improvement.

Now talking about our different lines of businesses CNI lending is our most important line of business and we've broken that down into privately held businesses in our own geographic market and privately held mortgage companies throughout the nation.

So our businesses are going for the private banking business we are between Boston and Philadelphia and banking the mortgage companies are all over the country.

We are targeting $100 million in annual revenues and less single point of contact businesses and we've supplement that with the SBA business which is also regional in nature to serve these small and medium sized businesses.

From banking the high net worth families that is only a regional business for with about 60% of the business coming from New York City and that to us is an approach that we've taken very very prudent approach over here and we believe that we have a very strong credit quality in this niche and that is run by people with over 30 years of average experience in this line of business.

One can say from the start we've had a strategy of running a company with strong credit quality and making up the lower margin through much better efficiencies. So our total cost of the percentage of assets 5 years ago were 2.5% today they are 1.2%.

So that is the difference where the average bank is still spending between 2.5% to 2.9% to run their companies by spending only 1.27% which is our number at March 31 to run the company. We can produce the same kind of results that you would expect from companies with 3.5 margin to produce with only a 2.8 to 2.85 margin.

And where is in our opinion a much more sustainable model. As the result of all this our book value over the last 5 years has gone up by 12% compounded and cut the shareholders over the last 5 years have seen their equity go up by 213% percent compared to less than 97% for the KBW regional index.

So let me share with you where do we sit today and how do we plan to cross the $10 billion mark. We are going to remain focused on the lines of businesses that have taken our company from $250 million problem bank to $10 billion high performing bank and that is not going to change. Our business strategy is clear it's working.

We will not deviate from what critical success factors so. Preview credit quality focusing on recruitment and retention of high performing teams and staying with our business strategy. So we believe that the model that's working for us in Boston and Providence in New York and Philadelphia can be repeated in other market areas.

So over the next couple of years, what you should expect us to do is to look at markets like neighboring markets like Washington DC market like Chicago and the light and not be surprised if we enter those markets as a business bank with private banking type of keeps.

Our focus will remain the same which is superior credit quality and the niches will be the same which are small, medium sized businesses below the $100 million in revenue and our revenue does it will be made up of just net interest income about coming out of low cost deposits as well as consistency of performance and manager of risks at the same time.

So CNI business you should expect that to continue to grow for us Arab but it at a clip of somewhere between $250 million to $450 million or $500 million a year as we cross but that business and that's good that's good other targets we set for ourselves.

Regarding multi-family over the last couple of years we have been looking at consistently almost consistently selling a portion of our production.

We did it again last quarter by creating liquidity and originating a lot of the business, so we will continue to do it that way but multi-family loans will be a significant part of our business but we don't believe it's going to be significantly in excess of 40% of our balance sheet.

As far as commercial real estate is concerned that is not very significant, but that we defined as non-owner occupied commercial real estate we think that is the highest risk business and we will continue to focus because of the volatility of that business we'll continue to focus on very selected niches in that area.

Banking the mortgage companies even though it's extremely volatile business but we are balancing it like you saw in the first quarter by either looking at investing some of those assets in multi-family businesses or investment securities or be willing to take a hit to our margin temporary it to our margin and making it up to operating efficiencies.

Since our strategy for the last 3 quarters has been to remain below $10 billion we've been very focused on improving our operating efficiencies and that's why you saw a flat expense. By design, so you should expect our expenses to go up because we need to invest in the infrastructure as we continue to build our company.

But the efficiency ratios should continue to improve. We won't be satisfied until we get to the high thirties in terms of the efficiency ratio. So with that I'd like to now ask Tom to open it up for questions..

Thank you, sir. [Operator Instructions] We'll take our first question..

Congratulations, this is Joe Gladue from Merion Capital Group..

Hi, Joe..

Hi, Joe..

I just wanted to touch base just a little bit on the net interest margin you had I guess on the cost side, I guess there was a significant increase in federal home loan bank borrowings.

Just wondering what's the duration and cost of those relative to I guess the cost of interest bearing liabilities you've had?.

Joe, one thing that we did that increased the.

Well let me put it this way, when the balances come down on the federal home loan bank borrowing we're paying off the short duration assets and so that leaves short duration liabilities which leads the longer duration liabilities in place and so as we bring down the -- as the balances come down and we pay down the shorter duration, the average cost goes up.

In addition to that when we did the investment securities, we've borrowed the monies to fund those with a bit longer duration that we would normally do close to two years and so that also provided some additional cost of borrowing, so it's a function of not so much what we did just that in terms of layering on higher cost borrowing so much as it is we pay off a lot of short term borrowings which then raise the average cost..

Alright. I just wanted to be sure if I heard you correctly you said that 38% is still a good tax rate to use going forward.

Just want to be sure the tax strategies you used in the first quarter won't have any real impact going forward is that correct?.

Joe the 38% is the basis where to start from but then you are going to have the effects of the accounting standards that became effective at the beginning of this year we early adopted in the fourth quarter of last year and that's going to consistently have an effect on the effective tax rate going forward.

I believe its part of the core operations, I think there's some discussion on that last quarter with them and amongst them..

Okay.

Alright and just I guess Jay touched a little bit on the new team hires but just wondering it's been a little tougher to add teams while you're trying to stay below $10 billion but just wondering if you have a good pipeline ready to go now unleash the balance sheet?.

Joe, yes we are constantly looking at recruiting teams and both within our existing market and for the longer haul outside our existing markets in those geographic markets that I just shared with you which is Washington DC and Chicago and to be our positioned within the next six months or so that we will bring him on board..

Alright, thank you..

And we'll take our next question..

Hi, good afternoon. Mike Pareto from KBW..

Hi Mike, how are you?.

Good thanks. Jay, I know you were probably limited to what you said, but I thought I had to ask.

Just any update on the BankMobile sale process that you can give us?.

I think Mike it's everything is on target based upon what we have said and we expect the BankMobile divestiture to be completed this year subject to regulatory approval. So all I can say is that if there are any more updates we will appropriately put them out immediately..

Okay. I have a couple of questions around deposit and $10 billion. I guess first of do you guys know you look at this kind of the geographic break out of your deposit base defense today.

I mean do you have an idea of how many your deposits are kind of more in the legacy Philly markets versus the Boston, New York and downtown Philly of the world?.

Mike, we have bank branches, the legacy bank branches in the Pennsylvania market, the legacy Philadelphia market.

So our retail and business banking operations are producing about 20%, 25% of the deposits are right here in this market the other 75% which includes New York principally are coming out of our private banking offices principally New York and we have about $100 million of deposits out of the New England.

And so the -- but the New York market has been the best market for us together with others..

And as you kind of move to grow past $10 billion I mean organically here.

Can you talk about the funding strategy a little bit, I mean when you go into these newer markets like DC, Chicago you are going to lead with some price and attract that way or how do you guys expect to kind of grow the deposit base as we go here losing the obviously at some point this year the BankMobile noninterest bearing deposits which you guys have made the use of over the last couple of years?.

Our strategy is been to recruit teams are not made up of just lenders but to recruit teams as we call them made up of bankers. And this would be teams of private bankers who are already managing a portfolio of deposits.

So the billion plus deposits that we've gotten in New York in the last few quarters, that came in through teams that we recruited including 2 teams from Signature bank. So that's how we intend to grow.

The teams we are recruiting first will be a liability base team, who can get deposits in for us and that will be followed by supplementing them by teams who will generate assets for us.

Our model of profitability and for creating the incentive compensation for our teams is very much based on much higher compensation if you can get self-fund yourself and generate those deposits.

And the lower cost deposits like DDAs and non-interest bearing, all interest bearing are the most common in terms of affecting your profitability of those teams. And you can have very profitable and extremely high incentive compensation plans, even if you don't generate a single loan. We have earning asset which are all across our region.

But the funding capabilities are the most important, so it's a funding driven strategy or a liability driven strategy that we will be pursuing as we expand our franchise. So we intend to get deposit, we intend to have a deposit gathering -- in each of the market.

So that right now we are operating without -- but will be converting many of those delta goes into deposit generating branches.

So that is a strategy that will replace some of the, if not all of the deposits that we are testing through the BankMobile sale and to our own franchise we didn't see a need to do that but now we will replace all anecdote principally the DDA area and the other low cost area and we are highly confident of replacing those deposits that will be lost through the BankMobile divestiture..

And you expect any increase in expenses as it relates to trying to kind of market the brand some of these newer markets I mean DC is obviously in the northeast corridor here but market like Chicago obviously there's quite a few other business banks would do longer establishment market there.

Do you expect that to spent some money to get the name out there or how are you guys thinking about that as you know potentially newer markets?.

Mike, have you seen any Customers Bank in New York?.

Yes, but New York is much more. You guys have been in the market longer much more densely populated you guys have hired team. There is going to be any different approach or anything that's worth noting as you kind of got into different markets versus New York which is pretty unique market..

Mike, people in Chicago think they're more unique than New York. So our strategy is going to be the same. We are not a retail bank. We are not going to be doing the typical marketing that you'd expect from retail or traditional banks.

Our marketing will be much more of the signature bank type, yes there will be some contributions or some involvement with the business community and the charitable community in each of those markets. But no, if you think we will be doing billboards or newspapers or television in these markets is that would be a wrong assumption on your part.

We do a -- for each of those markets that we are entering and our goal is that within one year we will be making up any of those startup expenses and there will be profit. .

Okay..

Okay, and then there is a growth rate. That is our business model. So as we develop that Mike, we will be sharing with a little bit more details with you that I can understand very much that you would want to see that sort of transparency.

But I just want wanted to go over the last 5 years because 5 years ago we were asked the question how can you generate loans and deposits in New York. Just like you're telling me now New York is different you guys are known. Guess what, we weren't known at all in New York.

We had a reception for our private banking clients, we had 135 people show up at 101 Park Avenue and those were the who's-who in New York City. Same thing goes on in Boston and Providence. It will take us a while 2, 3, 4 years but, I would expect you to ask a question Chicago it was easy for you but how is XYZ city will be for you..

Okay. Thanks. It's a fair point, I just curious because obviously every market is a little different and was wondering if you had any different agenda as you approach some of these new markets. So appreciate your time. Thanks..

And we'll take our next question..

Good evening guys. This is actually Rob Haderer filling in for Frank Schiraldi here at Sandler..

Hello Bob..

First I wanted to just sort of dive into the asset sensitivity position. You talk about the past your active sensitivity position. I guess is that contingent here on the warehouse down is bouncing back like we've seen in prior second quarters in that kind of 15% to 20% range here.

And secondly, what kind of deposit status do you assume in the asset sensitivity assumption?.

Okay. I'm looking for the page in the investor deck. There is a page in this investor deck where we do show if you want to take a look at that there is a 100 basis point increase and 200 basis increase..

So at March 31 with a 100 basis point increase using our simulation model, you should expect our net interest income to go up by 2.13%. Last year at the same time that would have gone up by 1.2% and -- I am sorry this is about the 100 basis points. For the 200 basis points it will go up by 3% and last year at this time they would have gone up by 1.4%.

So we are much more asset sensitive today then where at March 31 of 2016. And this net interest income simulation is based upon the asset liability model and it assumes flat balance sheet with no volume increases or decline and no strategies other than simply running a simple tradition model.

And that is the only way that you can compare apples with apples.

So even though you are so right mortgage warehouse business does affect the sensitivity but at the same time we extended our liabilities to dramatically reduce the risks of interest -- sensitivity for us and make us more sense to today during a time period when we expect that the rates might be going down..

And in regards, the betas obviously, the betas that we use to send upon the particular product and we do have some variation within them.

But I think the overall beta is about 50% and obviously we do have some products we're doing that or maybe a little bit more but there are other products who we haven't moved yet at this point in time despite having 3 interest rate increases..

Great. That's very helpful. So I guess in theory, 2Q plays out where you have a bounce back in the mortgage warehouse business in a mix shift sort of out of the securities portfolio back into the higher margin business.

In theory at least, your asset sensitivity position should increase from the number disclosed in the deck as of 3.31% is that a fair assumption?.

But do remember that our overall objective is to manage ourselves relatively neutral.

We're not looking to position ourselves for interest rate increases or decreases but to me remain relatively neutral because we're not betting on which that's not a business to estimate it, I am too bad as to which way their interest rates are moving we do try to maintain ourselves relatively new neutral and tend to our business of banking.

And I think you but I'm sure you're aware of this but about 70% of our CNI loans are immediately of valuable rate 100% of our banking to mortgage company loans that you refer to them as mortgage warehouse or variable rate and you didn't notice that in spite of the 75 basis points that moves over the last couple of quarters.

Yes, you see that we have moved our deposit and we are noticing banks simply shrinking and not passing on any other rate increases. That should also give you the comfort level that why our deposit business is continuing to grow because we are managing our company in a neutral basis.

We are not dependent on continuing to improve our profitability just by not passing on to higher rate to deposit..

That's helpful color. Also wanted to ask about credit, clearly non-performers are still at a very low level here which is good.

I didn't notice about a $10 million uptake in CNI nonperforming loans was wondering about any color there in terms of when those originated, size, type of industry, any sort of color on the uptake in non-performers would be helpful..

Yes, sure. There were basically three loans, two of them are SBA guaranteed loans and one of them was not. In that situation it was all about a business model. It's amazing when you are bankers make credit decision, the last thing we worry about is the impact of technology on your business.

And right now it is the number two item in our assessing whether we should extend credit to a small, medium sized business is there impact of the changing technology consumer trends on that business. That's the number two fact to be considered.

So those, all those three credit problem of loans we believe that they have been resolved but that's not to say others won't come in. We are in the risk taking business, but our belief is that the kind of business we are running you should expect us to have about 50 basis points non-performing loans on a sustainable basis..

Got you, and one last one for me. You gave a lot of good color on potential new markets.

I know it's not been your MO in the past, but market like Chicago and noncontiguous market would you consider M&A to enter those markets or not?.

My model is organic growth. So I will never say never, but we are not focused on M&A, we are focused on tangible book value growth not justifying a 5 year payback on tangible book value dilution. We believe that we are extremely attractively valued at only 11 times earnings and 145% of book value where we are trading right now.

It makes a whole lot of sense for us to continue doing what we've done because that's resulted even though we are attracted the price that's resulted in way above average accounts but our shareholders.

So the model that's worked for us in the past, we believe is the model we stick with and continue with our organic growth and just be extremely optimistic if we see for an opportunity for an M&A. But M&A is not our prime strategy..

Got it and to go back to the credit real quick, sorry to jump around. You mentioned one of the credit the company being negatively impacted by technology is that a technology company itself or is it a different industry..

No, it's in the different industry..

Okay. And I know you did allocate some specific reserves this quarter. You mentioned you think that probably covers it.

You anticipate to working out those credit yourself or do you think those credits get -- way how do you think gets resolved?.

Those credits are -- have been worked on..

Okay..

Already..

We'll take our next question..

Bill Dezellem from Tieton Capital Management..

Hi Bill..

Wanted to follow-up on your expansion strategy Jay.

What are your thoughts on the smaller cities say between Chicago and the I95 corridor like a Pittsburg or Cincinnati any others like that?.

I think we look at the dominance of large banks those are very attractive markets the ones that you are naming. But to be able to recruit teams would bring a book of business with them. It's a whole lot easier if those teams right now are already have $200 million to $400 million portfolio.

The -- deposits or loans that they are managing and that usually is a whole lot easier to identify in the larger markets.

And then you can recruit those teams and then our incentive compensation plan is very attractive because those are the teams who can see who in the past may have gotten into the noble banking, and now the noble banking is not an option.

So we basically inset them in a way that come and join us, our family and look at our existing teams, and what are they doing and you are pretty much on a defined area where risk management is very clear that you cannot violate that but within that framework you are basically operating your own bank.

That's why we are focused more on the bigger markets right now but that's not to say that later on we will not focus on the next Tier but there is so much of business in our opinion that was available in New York and in Boston and less so in Philadelphia to be honest with you. In all of our key markets Philadelphia is our smallest market.

And we probably see Virginia, D.C., Maryland area is a very attractive market and we are already doing enough business in Chicago to really take off from that because we've been operating out of our New York operations to serve Chicago and we like that market and the disruptions in that market and we like the idea that there is M&A activity taking place in that markets and maybe we can put up teams..

Let me take that question and move south with it.

To what degree would you have an interest in a market like Atlanta which is larger but may or may not be different from the market you currently operated?.

At good time we're only focused on the two markets that I shared with you but we will do loud Atlanta but we got to take some baby steps and make sure that things are working well, they are not perfect, you know, they are not execution.

So right now we want to limit it to about two new markets and for the next 12 to 18 months and make the learning from our mistakes, I'm sure we'll make some. And from this and after that look at the other markets; and I think Atlanta is on our list..

Thank you for the perspective..

And there are no further questions left in the queue. Mr. Sidhu, I'd like to turn the call back over to you for any closing remarks..

Well, thank you Tom and thank you very much ladies and gentlemen for joining our call. If you have any other questions, please give us a call. Thank you..

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation..